Pension tax change may add unused pensions to estates for inheritance tax

New UK rules due in just over a year will treat unused defined contribution pensions as part of estates for inheritance tax, which could increase the number of estates subject to IHT. The article reviews current thresholds and how spousal rules and gifting allowances interact with IHT.

New UK rules will treat unused defined contribution pensions as part of a person's estate for inheritance tax in just over one year. The change is expected to bring more estates into the scope of inheritance tax, while overall rates of estates paying IHT are likely to remain relatively low. The shift has prompted attention because it could lead to unexpected tax bills for some families. The article outlines the current thresholds and the ways certain exemptions and gifting rules affect estate calculations. Key details: - Unused defined contribution pensions will be counted as part of estates for inheritance tax from just over a year after the article's publication. - The inheritance tax nil rate band is £325,000, and the residence nil rate band for passing a home to a direct descendant is £175,000. - A surviving spouse or civil partner can receive assets tax-free under the spousal exemption and can inherit any unused nil rate bands; cohabiting partners do not receive these same provisions. - Gifts to individuals are treated as Potentially Exempt Transfers and leave an estate for IHT purposes after seven years; the annual gifting allowance is £3,000 and unused annual exemption can be carried forward one year. Summary: Including unused defined contribution pensions in estates is likely to increase the number of estates liable for inheritance tax. Undetermined at this time.